Wall Street’s Multi-Billion Dollar Bad Data Problem

Originally published in TabbFORUM

There’s an open secret on Wall Street familiar to anyone who has spent time inside the central nervous system of financial institutions: inaccurate, mismatched, or outright missing data is an everyday expectation in the systems underpinning global markets.

Operations consume nearly 20% of global banks’ $1.4 trillion cumulative budgets and, according to Broadridge, 30–40% of back office costs are spent on reconciliation processes. That means financial institutions are spending tens of billions of dollars per year cleaning up broken data. While efforts have been made to improve reconciliation with optimized processes or technology, relatively little has been achieved to ensure data is correct at the outset.

The Real Cost is Far Greater

The reconciliation costs described above do not include the downstream costs incurred by the industry as a result of that incorrect, late, missing, or otherwise broken data, which are becoming increasingly acute every year.

Regulators have not been shy about penalties for deficient operational processes. One of the largest global banks was recently fined $400M by the Office of the Comptroller of the Currency for operational deficiencies, with a dozen references to data quality in the Consent Order, including an explicit requirement to “strengthen procedures and processes for the continuous improvement of data quality.”

The Impact on Capital Costs

The ubiquity of the problem has caused regulators to incorporate penalties where financial institutions will feel it the most: capital costs. As a critical component of Basel III — a global regulatory framework — operational risk is factored into the amount of capital banks must hold against their assets. The more operational risk they have, the more capital gets tied up, reducing the opportunity for revenue-generating use of those funds.

When assessing operational risk, the Basel III framework looks at business disruption and system failures. Take, for example, the near collapse of the futures market during COVID — volumes rose 65% above the previous year, and “banks’ back-office margin systems buckled under the sheer weight of trading volumes resulting in missed margin payments.”

As one large bank executive was cited at the time, “run-of-the-mill operational errors by brokers and clients also contributed to the problem.” In practice, many holdups stem from manual interventions necessary to correct basic errors. “The reality is, if someone puts in the wrong account number or sends the wrong file, then it’s like a traffic jam.” During the heaviest week of trading in mid-March, “teams were working 24 hours a day to clear the backlog.”

Hedge fund managers share in this burden as well, citing “bad investments, loss of business and potential legal liability” as some of the consequences of inaccurate data.

Left Unaddressed, the Problem Will Only Get Worse

The incredible growth of data is exacerbating the data management issue in financial markets. From 2018 to 2025, the volume of data produced by financial institutions is expected to grow by 5X.

Source: IDC

Perhaps not surprisingly, 85% of banks, investors, and capital markets service providers plan to increase spending on data management.

Source: Coalition Greenwich

The question remains, how much of that will be spent reconciling data problems after they happen — as is so often the case today — and how much will go towards investment in solutions to address the underlying causes?

In future posts, we’ll dive into the root causes of bad data and provide insights on how it’s being addressed by the world’s leading institutions.

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Axoni is a real-time data replication company serving the world’s largest financial institutions. Axoni’s platform enables rapid deployment of critical financial networks and automated, real-time data replication across market participants. Founded in 2017, the company serves banks, asset managers, hedge funds, and financial market infrastructure firms across the globe from offices in New York and London.